Here is why gold can outperform equities and give 25% returns in 2021

With physical demand improving from China and India, we expect Gold prices to touch Rs 62,000 mark per 10 grams in domestic markets by 2021," Sunilkumar Katke, Head - Commodity and Currency at Axis Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.

For Gold and Silver, the only factor that may cap the rally is the vaccine success, he added.

On the crude oil front, for 2021, he expects the prices to stay in the range of $45 to $60 mark, with a buy recommendation around $45 mark with a target of $60 mark for Brent crude.

Edited excerpts:-

Q: Gold has given a strong return of 23 percent in 2020. Do you expect similar kind of return in 2021 too, and why? What is your overall outlook on yellow metal?

Gold's Glitter looks more likely to continue in the year 2021 owing to lower interest rates, negative real yields, depreciating dollar, ongoing mega stimulus measures by central banks and uncertainty linked with the new strain of COVID-19. More than $10 trillion worth of stimulus measures were initiated across the globe to overcome the challenges thrown by the pandemic and it will take at least 1 to 2 years for most of the central banks to recover the debt and revive their balance sheets back on track. This will support the yellow metal pricing this year. Decent buying from central banks and inflows through ETFs will continue even this year as the safe haven appeal remains intact based on current fundamentals. With physical demand improving from China and India, we expect Gold prices to touch Rs 62,000 mark per 10 grams in domestic markets by 2021 at 25 percent growth.

Q: Also will the gold continue its outperformance over equities in 2021?

Equity markets are witnessing liquidity driven rally and have managed to close around their multi-year / life high levels by the end of 2020. We may witness consolidation in between and we believe that the yellow metal has enough fundamentals for the coming year to help it continue its rally and cannot take out the possibility of it outperforming equity in 2021, the demand from fund managers / institutions from overall portfolio diversification perspective will remain intact to maximise the returns and minimise the overall risk.

Q: Crude oil prices gradually climbed above $50 a barrel in December and sustained above the same level so far. Do you expect the commodity to hit $70-75 a barrel on the Brent futures in 2021 and why?

The Crude oil prices have maintained a range near $50 mark due to mixed fundamentals, on one front, the stimulus packages and vaccine news is supporting the projected improvement in demand as we move ahead, as most of the countries are back to their normal functioning with precautions, and on the other hand actual demand recovery will take time as the OPEC plus nations will resume increasing output from January 2021 onwards, increase in US rig counts is also indicating towards decent supply in the market. We may expect the output cuts implemented due to lower demand during the pandemic by almost 7.5 mbpd shall resume back in a phased manner and will cap the prices from extreme upward movement. For 2021, we expect the prices to stay in the range of $45 to $60 mark, with a buy recommendation around $45 mark with a target of $60 mark for Brent crude. Domestically, we recommend a buy around Rs 3,200 a barrel targeting Rs 4,500 during 2021.

Q: Base metals rallied sharply in past several months given the recovery in China and other counterparts globally, weak US dollar etc. Do you think the rally will extend in 2021 too and why?

Most of the base metals rallied due to improved demand from China and overall supply concerns as the countries started their manufacturing activities after months of lock down. With more money being pumped in the economy by most of the countries, demand for industrial metals is picking up. The same is supported by a weaker dollar as it makes it much affordable for countries to import dollar denominated commodities at lower prices, improving overall demand. We expect that the prices have rallied as per their current fundamentals and can have a view of buy on dips for most of the base metals like Copper, Zinc and Nickel where some more steam is left considering the overall positivity in the market due to vaccine and stimulus measures news backed by demand from China and other European countries.

Q: What is your outlook on natural gas?

Natural Gas prices have witnessed a correction from its recent highs of Rs 250 per unit (mmbtu) to current levels of Rs 180 per unit as milder than expected weather forecast reduced the demand for this energy product. The winter demand from US may support the prices to recover in coming days and we recommend a buy around Rs 175 per Unit targeting Rs 220 in the coming months. Since natural gas is a weather driven commodity we don't expect extreme change in prices and may stay in the range of Rs 160 – 250 during the coming year.

Q: What are the key risks and positives to play crucial role in non-agri commodities in 2021?

The key positives for commodities will be the accommodative stance of central banks, lower interest rates, negative real yields and higher inflation due to liquidity infusion, which will drive demand of precious metals, industrial metal and energy sectors with low cost and cheap money availability. For Gold and Silver, the only factor that may cap the rally is the vaccine success and performance of riskier assets like equity which may shift focus from safe haven demand of Gold towards rallying equity markets.